A Comparative Study Of The Mutual Fund Design

According to the Investment Company Institute, ICI, mutual fund assets worldwide have reached $22.38 trillion at the end of the third quarter of 2009, of which Americas account for 55%. Undoubtedly, the mutual fund market in the United States is the largest and most mature, where the industry has developed for nearly one century. In the meantime, as one of the most typical and important developing countries, China has witnessed its mutual fund market growing at even a faster rate than that in the US in recent years, although it has been only about ten years since its first modern open-end fund was launched. Thus it would be worthwhile to compare the mutual fund industry in the two countries to find out their similarities and differences, and also beneficial for China to learn from its counterparty’s experience.The mutual funds in US and the securities investment fund in China are generally viewed as referring to the same products, but in fact securities investment funds in China include both open-end and closed-end funds, whereas the latter are not in the category of mutual funds in US, so when the term "mutual fund" is mentioned in China in this paper, it stands for the open-end fund. After definition of the main concepts, the historical and current development of mutual fund industry in both countries is summarized.Then a comparison of investor composition and their behavior will be made between the two countries. Mutual fund shareholders are comprised of institutional and individual investors and a further analysis of the detailed structure of this composition is conducted and fluctuation in economic environment, growth of US retirement market and regulatory policy change in China are concluded as factors that influence the relative weight of the two kinds of investors. Individual investors are also analyzed from demographic and financial perspectives and their motives as well to understand their behavioral patterns. Chinese individual investors are found to lack experience, be less resilient, less aware of retirement savings and more affected by disposition effect and herd behavior and their redemption rate are higher than those of US investors.The third chapter of this paper focuses on fund design, in terms of products, channels and fees. Generic mutual fund classification is the same in both countries, and due to the plunge of stock prices in 2008, most stock funds decreased more than a half in size and meanwhile money market funds gained popularity thanks to their capital guarantees. But in China, there are not as many product types as that in US and many funds are similar to each other in investment strategies. There are four distribution channels in US:sales force, direct sales, employer-sponsored retirement plans and fund supermarkets, but the last two are not in the category of the distribution system in China. Professional financial advisers have been the primary source for purchasing mutual funds in both countries, but retirement plans have been supplying long-term and stable capital for US mutual funds and their proportion has been on the rise. Respective features of all these channels will be taken into comparison as well. Lastly, fee structure, influence factors and recent trend, and as the price to pay for the services from the investment advisers and an pivotal part of the fund design, management fee, related practices in both countries and literature review as to the interrelationship between management fee and mutual fund performance will be detailed in the rest of this chapter.In the last chapter, an empirical analysis will be implemented in the Chinese mutual fund market in order to check whether the management fee can exert an influence over the fund performance and further examine whether the claim for a management fee decrease in the economic downturn is reasonable and justifiable. Based on the precedent research of Golec (1996), this paper first hypothesizes that management fee and mutual fund performance are positively correlated. But by use of a regression over ninety-nine mutual funds that were launched during the period between 2002 and 2004, the result shows that management fee and fund performance have a negative relationship in China. To understand the reason of this result, this paper tries to explain from the premise of Golec’s study, showing that management fees cannot exert a properly incentive influence over fund managers’behavior since the Chinese mutual fund market is far from competitive and management fee revenues earned by the fund management companies are not in positive proportion to the fund performance. The result indicates that funds charging higher management fees tend to show a worse performance, so it seems feasible to lower the management fee level so as to push a better performance of the mutual fund industry. However, considering the operative difficulties, learning cost of new funds and desire for product innovation, it is not wise to require a uniform management fee decrease. Possible measures can be taken to align the interests of the fund management companies and investors and revision can also be made based on the current management fee practices, such as the step-down management fee.